REVENUE RULING 84-126
1984-2 C.B. 181

[IRS Annotation]
S corporations; stock casualty insurance companies. A stock casualty insurance company may make an S corporation election as provided under the Subchapter S Revision Act of 1982. This election will not terminate unless section 1362(d) of the Code or certain provisions of the Act become operative. Rev. Rul. 74-437 obsoleted as of January 1, 1983.

Rev. Rul. 84-126

ISSUE
What effect does the Subchapter S Revision Act of 1982 (Act), Pub. L. No. 97-354, 96 Stat. 1669, 1982-2 C.B. 702, have upon Rev. Rul. 74-437, 1974-2 C.B. 274?

FACTS
Revenue Ruling 74-437 holds that a stock casualty insurance company taxable under section 831(a) of the Internal Revenue Code that otherwise meets the requirements under subchapter S as a small business corporation as defined by section 1371(a), as in effect prior to the Act, may make a valid election under section 1372, as in effect prior to the Act.

LAW AND ANALYSIS
Section 1362(b)(1) of the Code provides that a small business corporation may make an election to be an S corporation for any taxable year at any time during the preceding taxable year or at any time during the taxable year and on or before the 15th day of the third month of the taxable year.

Section 1362(d)(2) of the Code provides that an election to be an S corporation shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) the corporation ceases to be a small business corporation. The termination [182] shall be effective on and after the date of cessation.

Section 1361(b)(2)(C) of the Code provides that an insurance company subject to tax under subchapter L is an "ineligible corporation" that cannot elect to be taxed as a small business corporation.

Section 6(a) of the Act provides that except as otherwise provided in that section, the amendments made by the Act shall apply to taxable years beginning after December 31, 1982. Section 6(c)(2)(A) of the Act provides that the Act's amendments will not apply to any qualified casualty insurance electing small business corporation, and that subchapter S (as in effect on July 1, 1982) of chapter 1 of the Code and part III of subchapter L of Chapter 1 of the Code shall apply to such corporations.

Section 6(c)(2)(B) of the Act defines a "qualified casualty insurance electing small business corporation" as any corporation described in section 831(a) of the Code if, (i) as of July 12, 1982, such corporation was an electing small business corporation and was described in section 831(a) of the Code, (ii) such corporation was formed before April 1, 1982, and proposed (through a written private offering first circulated to investors before such date) to elect to be taxed as a subchapter S corporation and to be operated on an established insurance exchange, or (iii) such corporation is approved for membership on an established insurance exchange pursuant to a written agreement entered into before December 31, 1982, and such corporation is described in section 831(a) of the Code as of December 31, 1984. A corporation shall not be treated as a qualified casualty insurance electing small business corporation unless an election under subchapter S of chapter 1 of the Code is in effect for its first taxable year beginning after December 31, 1984.

Sections 6(c)(4)(A) and (B) of the Act provide that the provisions of section 6(c)(2)(A) and (B) of the Act shall cease to apply with respect to any corporation after:

(1) any termination of the election of the corporation under subchapter S of chapter 1 of the Code (as in effect before the Act), or

(2) the corporation ceases to be described in section 831(a) of the Code; or

(3) the first day on which more than 50 percent of the stock of the corporation is newly owned stock within the meaning of section 1378(c)(2) of the Code (as amended by the Act) with December 31, 1984 substituted for December 31, 1982 each place it appears in section 1378(c)(2) of the Code.

Section 1378(c)(2) of the Code, as amended by the Act, provides that stock held by any person on any day shall be treated as newly owned stock to the extent that the percentage of the stock owned by such person on any day, exceeds the percentage of the stock of the corporation such person owned by such person on December 31, 1982.

HOLDING
A stock casualty insurance company that qualifies under section 6(c)(2)(B)(ii) or (iii) of the Act can make an election to be treated as a small business corporation under prior subchapter S rules, as in effect on July 1, 1982. Furthermore, a stock casualty insurance company that qualifies under section 6(c)(2)(B)(i) of the Act and has elected to be treated as a small business corporation under prior subchapter S rules, as in effect on July 1, 1982, will not have its election terminate as a result of its being an ineligible corporation under section 1361(b)(2)(C) of the Code.

A corporation will cease to be a "qualified casualty insurance electing small business corporation" under section 6(c)(2) of the Act if: (i) that section ceases to apply by virtue of section 6(c)(4) of the Act, or (ii) it changes its operation to a noninsurance business. However, in such cases, the corporation will not have its S corporation election terminate except in accordance with section 1362(d) of the Code.

EFFECT ON OTHER REVENUE RULINGS
Revenue Ruling 74-437 is obsoleted as of January 1, 1983.